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Eight predictions for the Autumn Statement

Chancellor George Osborne is preparing to wield the axe again, but just what will he chop to cut government spending?

 

by Michelle McGagh on Nov 22, 2012 at 11:38

Eight predictions for the Autumn Statement

The chancellor’s Autumn Statement is already causing a stir, with rumours of pension relief cuts and that evergreen topic of a wealth tax, but just what can we expect from his announcement on 5 December?

Richard Mannion, national tax director at accountants Smith & Williamson, believes there will be bad news for the ‘squeezed middle’ but that chancellor George Osborne will resist tinkering with pensions tax relief, although he believes it won’t be safe for long.

1. Pensions tax relief

Everyone who saves into a pension gets tax relief on their contributions. If you are a basic rate taxpayer you receive 20% relief and higher rate taxpayers receive 40%.

The 40% relief has been subject to much scrutiny and the Liberal Democrats have made it clear they want to scrap it. The argument for scrapping it is based on the fact that most tax relief is received by the wealthy who then become 20% tax payers in retirement so do not ‘pay back’ the full relief when they get their pension.

‘Cutting higher rate pensions tax relief is the little boy who cried wolf – it is always talked about and one day it will happen. My personal view is that it will not [be cut] in the Autumn Statement but is costing the country a lot of money so it is only a matter of time [before it is cut] unless we have a recovery soon,’ he said. 

‘The country cannot afford to pay people’s pensions for 20 or 30 years and the relief is costing £40 billion a year [for both higher and basic relief] – it is a very valuable relief.’

2. Pension allowance

Mannion said a cut to the annual allowance for pension contributions is more likely. Each year you can save a maximum of £50,000 into a pension, or £1.5 million over your lifetime, known as the annual allowance and lifetime allowance respectively.

Although these allowances have already been cut from £255,000 and £1.8 million, they could be cut again.

‘It may be that the pensions annual allowance of £50,000 is brought down to £40,000,’ said Mannion.

He added that the government may also have its eye on the ‘very generous’ carry-forward allowance. If you have not used any or all of your annual allowance in the past three years then you can carry it forward – meaning you can save up to to £200,000 in one year (£50,000 for each of the three years you have not contributed plus £50,000 for the current year).

Hargreaves Lansdown head of pension research Tom McPhail agreed that a cut in the annual allowance was more likely.

‘If there is a change, a reduction in the annual allowance is the most likely outcome but we can’t rule out a restriction on the rate of tax relief, in spite of the additional complexity this would inflict on investors,’ he said.

3. Wealth tax

The coalition has battled it out over a wealth tax; the Lib Dems wanted one but the Conservatives didn’t and it looked like the Tories had won, until now.

Although a mansion tax on properties worth £2 million or more has been ruled out there could be a re-jig of council tax bands to ensure those with higher-value properties pay more, said Mannion.

‘There is talk about moving the bands used for council tax because at the moment a £1 million house pays the same rate as a £20 million house. However, this will be seen as a London tax and [mayor] Boris [Johnson] will have a lot to say about it,’ he said.

Mannion added that council tax bands have not been updated since 1991 and because there are no resources to overhaul the system the councils may say that if your property was worth ‘X’ in 1991 it is now worth ‘X’ more – essentially using guesswork to determine the current value.

‘The question is who will get the money, councils collect and use it but it is central government that wants it,’ he said, adding that the government could take any extra that is made on a change to council tax bands.

4. Economy

Osborne (pictured) is under pressure to use the Autumn Statement to kick-start the economy. Although there have been efforts to cut red tape for businesses and there is talk of using pension funds to invest in infrastructure, the truth is we have a £48 billion black-hole that needs to be filled.

Mannion believes the only way to do this is through more cuts.

‘It is never going to be as good as it used to be. If you look at the world as one big pot, then look at the Bric (Brazil, Russia, India and China) countries – they are taking more [of the manufacturing roles and business] and that means that there has to be someone getting less,’ he said.

‘We have not made anything in years and are trading in invisibles – we are a small player in a global economy.

‘If you have a shortfall you either need to spend less or bring in more and I am not sure where more will come from.’

Mannion added that there are a significant number of people in the UK who are not working and predicted benefit cuts are on the way.

The Social Market Foundation and the Royal Society of Arts said that the ‘small print’ of the March Budget suggested there would need to be an extra £26 billion of cuts but with the economic situation faltering there would have to be a further £22 billion of cuts.

5. Squeezed middle

The middle-classes feeling the pain of child benefit tax cuts and high petrol prices will not get any respite soon.

Although the masses would like to see the super-rich take a hammering, for the government it is more profitable to tax a larger number of people.

‘Everyone will have to take some pain somewhere. Everyone says "tax the rich" but it is not as good for the government as taxing the middle class because there are more of them. It is a numbers game,’ said Mannion (pictured).

6. Income tax

Income tax has already been tinkered with in the March Budget, and although there has been rumours that those earning £150,000 or more will again have their income tax reduced back to 40p from 45p, Mannion does not believe it will happen.

However, this also means that an increase in the threshold for the tax bands is also unlikely to happen. In the March Budget the government announced the phasing in of the £10,000 personal allowance for everyone by 2015/16 but it also announced a cut in the threshold for the 40% income tax rate from £42,475 to £41,450. This means that although the overall number of taxpayers will fall 300,000 more people will be pushed into the higher rate tax bracket.

7. Capital gains tax

There have been calls from the Left to increase capital gains tax (CGT) to bring it in line with income tax, like it used to be. Currently basic rate taxpayers pay 18% on capital gains over the £10,600 allowance and higher rate taxpayers pay 28%.

Mannion believes the government will leave this alone in the Autumn Statement as ‘it was part of major changes two years ago’.

8. Inheritance tax

Inheritance tax (IHT) is an emotive issue, which is why Mannion said the government won’t dare to touch it. Currently IHT is due on estates valued at over £325,000, with 40% tax paid on anything over this.

‘The Office of Tax Simplification looked at all the reliefs and said IHT was a basket case that needed completely reforming. Nothing happened and when I enquired I was told that no minister wanted to be seen as the one who changed IHT because it is such an emotional issue,’ he said.

‘It only raises £3 billion to £4 billion each year which is a drop in the bucket but it is one of the issues where the emotional reaction is inverse to the amount of money raised.’

8 comments so far. Why not have your say?

Jon

Nov 22, 2012 at 16:36

If they limit pension contribution tax relief to the basic band, then they should raise a benefit in kind to all of those whose employers pay a contribution, add this to the salary and then, if the total hits the higher rate band, tax the employee at 20% on this employer contribution excess.

Of course MPs would not think of this fair approach as they wooul have to pay more tax !!!

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easy life

Nov 22, 2012 at 19:41

Limiting tax relief on pension contributions to 20% is fair. Its not difficult to work out the payment in kind benefit in paye and the rich/middle classes will save anyway. But as mentioned PM's would pay more so I guess it wont happen!

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Tortoise

Nov 22, 2012 at 21:29

Richard Mannion as a tax accountant should know better. It appears to me (another tax accountant) that he does not understand the taxation of private defined cost pensions. If the government cuts the higher rate tax relief on contributions then it should, if it has any sense of fairness (debateable) no longer tax the receipt of pensions at the higher rate. The reason for this is that pensions are taxed as income when in fact they are a return of your own money. Why pay tax at 40% back to the government when you only got 20% TAX RELIEF IN THE FIRST PLACE?

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Anonymous 1 needed this 'off the record'

Nov 23, 2012 at 09:05

Sad, instead of assisting small Companies and businesses with tax incentives to get people back to work and get the economy going, they harp on about the above pensions, inheritance tax etc. basically trying to steal from people who have made the effort to earn something, but then we are a socialist welfare state, still sad......

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Anonymous 2 needed this 'off the record'

Nov 23, 2012 at 15:10

The bigger issue on pensions is not related to tax, but to auto-enrolment and the Pension Credit. Already thousands of people, and every month thousands more, are being dragooned into a scheme where they will gain no benefit at all, or at best very little benefit. As this is not an easy thing for the press to understand, it could take years for the penny to drop, and I fear that this is what the Government is relying on. Auto-enrolment is a device to save the Government money in Pension Credit.

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SKYSHIP

Nov 23, 2012 at 17:50

Limiting tax relief on pension contributions to 20% is both fair and politically astute - this latter being something this Government has been particularly inept about! That said, as Tortoise states above, income from pensions should then only be taxed at the same 20% rate.

Whilst on the subject of pensions, he must do something about the iniquitous GAD rate which is savaging those in Income Drawdown.

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Graham D-C

Nov 24, 2012 at 18:13

IF we are a "small player in a global economy" then our spending on defence needs to be cut to reflect same. We should not replace the Trident nuclear submarine force and instead increase the number of attack submarines and arm a proportion of them with nuclear tipped cruise type missiles.

Withdraw all British frontline troops and support personnel from Afghanistan by end of 2013 and immediately start to progressively cut aid to to the corrupt government. Stop all any any aid to nulcear armed Pakistan a country that has betrayed the NATO coalition forces in Afghanistan-U.S. Admiral Mullen's tirement address to Congress.

Refuse to accept any EU budget that is not cut in real terms and cut British snouts in the EU trough to essential personnel only.

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Tina Troy

Nov 24, 2012 at 21:35

Why not simply put a small tax on expats who have left the country but wish to retain a passport (and the right to come back and use services). It would raise revenue, not impact the economy and discourage the brain drain

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